Commodities have had a mixed start to 2017. The Bloomberg Commodities Index is down 2.5% year-to-date (to 31 March 2017), after a substantial drop in the oil price in March pared back gains made earlier in the first quarter.
However, this pullback has not altered our view that a convergence of favourable factors will push commodity prices significantly higher this year.
An OPEC-production cap, strikes at the world’s largest copper mines and stronger global growth are just some of the elements that will help to support price increases across the commodity market in 2017.
The prospect for base metals looks particularly positive, though we also expect supply discipline to keep the oil price on an upward trajectory. Precious metals will be buoyed by the return of inflation. In this benign environment, we expect more investors to recognise the benefits of holding commodities within an investment portfolio.
Commodities tend to be lowly or negatively correlated with stocks and bonds making them a strong diversification tool. An allocation to commodities can also act as a hedge to geopolitical risks and inflation.
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